Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
According to a story published recently, Gilts are outpaced and their golden age is over. As contrarians, the story tells us the wisdom of the old saw "always do the opposite of what the populist press recommends".
The argument used is well-known - the Government isn't selling many new Gilts, and yields are low. Such arguments look backwards, not forwards. Britain today is at the tail end of an artificial credit boom, and the next recession is approaching. Recession causes Government to lose tax revenues while its social costs rise steeply. So, in a couple of years, Government will again be selling lots of new Gilts. That disposes of the first point in the mistaken argument.
As for yields, Government is the biggest beneficiary of lower yields. When it suits the political need, interest rates will be cut and cut again, notwithstanding the notional independence of the Monetary Policy Committee. The news stories will be spun accordingly. For most people (but not for contrarians) the big surprise will be that in two or three years' time, Government will be selling new Gilts to willing buyers at higher prices (that is, at lower yields). When Britain escaped the last recession, the same happened - yields tumbled, new Gilts appeared, and most people missed the boat. Yields have much further to fall. The second plank of the case is therefore equally mistaken.
For contrarians, another interesting point follows. The one thing we learn from history is that people never learn from history! The evidence of the deflationary forces spreading from the East, the evidence of what happened in Japan as its stock market declined and interest rates crashed, then only later did the deflationary mire become obvious, all seem to be beyond the simplistic nature of mass commentaries.
Our view is that yields of 1% in cash and 2% to 3% in Gilts will be with us in well under ten years. Those seeking income need to plan accordingly. Is it so difficult to think about the future?
You are welcome to quote or re-use this material, provided you acknowledge the source "www.contraryview.co.uk, published by Kauders Portfolio Management".
Return to home page of contrary view or return to complete index
For information about our advice and services visit our main site or click for contact details
WARNING: The firm can only be responsible for action taken on our advice given personally and specifically to be suitable for each individual. Statements on this site do not, on their own, constitute advice. Please note that UK regulatory requirements prevent us commenting on your existing investments or giving specific advice, unless you first sign one of our portfolio service agreements.
This advertisement has been approved by Kauders Portfolio Management, who are authorised and regulated by the Financial Services Authority in the conduct of investment business in the UK. Opinions and statistics are valid at time of publication but may differ later. We leave them on the site so that you can see how useful our point of view has been.
© Kauders Portfolio Management 2000